MS Stock: Is It Time to Go Bullish on Morgan Stanley?

By Gaurav S. Iyer, IFC Published : April 18, 2016

Morgan Stanley Q1 Earnings

Morgan Stanley (NYSE:MS) could be hitting a bottom, because the market barely responded to Morgan Stanley Q1 earnings. If anything, Morgan Stanley stock may see a small move to the upside, meaning the market already priced in the most recent Morgan Stanley earnings report.

Why is that? Shouldn’t the share price decline if the business is suffering? Not exactly.

MS stock has dropped steadily over the last 12 months, from $36.96 per share to $25.84 (at the time of writing). The 30% fall came on the heels of a weak oil market, a slowdown in China, and some monetary policy gymnastics from the Federal Reserve.

The Fed has contorted itself time and time again by making promises it can’t keep. The Fed hadn’t accounted for a sudden breakdown in the Chinese stock market or its weakening gross domestic product (GDP) growth. And on top of everything else, energy prices continued to stagnate.

Bank stocks were getting crushed by the combination of those factors. Analysts had projected earnings of $0.46 per share compared to $1.18 per share last year. So even when Morgan Stanley delivered $0.55 per share, the stock wasn’t hurt. (Source: “Morgan Stanley Reports First Quarter 2016,” Morgan Stanley, April 18, 2016.)

Expectations were already so low that nothing happened to MS stock. I know the logic sounds a little warped, but this situation provides an incredible trading opportunity.

As investors, our job is to spot underpriced securities. That means finding a stock that is trading below its potential value and selling it when it reaches that value. Buy low, sell high—that’s the motto.

It’s everyone’s dream to cash in and live on a beach somewhere, lounging on hammocks and sipping drinks with little umbrellas in them. But as it turns out, finding underpriced securities is hard because you have to fight your fear.

Now that MS stock is down so significantly, the only question is whether or not it’s trading below its potential value. I think it is, because bank stocks usually move in sync with the economy.

During the financial crisis, Morgan Stanley’s share price fell as low as $14.75 before bouncing back to $32.00 in the autumn of 2009. Then in 2011, when Greece, Italy, Portugal, and Spain were on the verge of bankruptcy, MS stock dropped to $13.51 per share.

From there, it began a steady climb back upward, all the way to $38.84. Now that we’re seeing a slump in Morgan Stanley’s business, it’s tempting to turn bearish on the stock. However, these are the moments that keep average investors from getting rich.

We’re already starting to see a floor in bank stocks. Financials were the best-performing sector last week, even though profits declined across the board. It looks like investors could rebound soon, so you better act quickly. It’s time to fight the fear.